2012: a better year ahead? | January 04 2012
A brief look at what 2012 might bring
While not quite an ‘annus horribilis’, 2011 was certainly an eventful year with uprisings in the Middle East, the earthquake in Japan, political deadlock in the US and new governments in Greece, Italy and Spain. From an investment perspective, continued sovereign debt issues in Europe, S&P’s downgrade of the US and slowing economic growth all contributed to a -7.34% decline in the UK stockmarket over 2011.On the positive side, a ‘flight to safety’ resulted in positive returns for gilts, inflation-linked bonds and high quality corporate bonds showing, once again, the benefits of holding a diversified portfolio.
We suspect that 2012 is likely to be dominated, yet again, by macroeconomic and political headlines resulting in a market where sentiment whip-saws between hope and fear. Europe will certainly be at the forefront of investors’ minds early in 2012 as politicians try to prevent a crisis in market confidence turning into an insolvency crisis. While core Europe (Germany, France etc) look able to weather the storm, investors are less sure that highly indebted nations such as Greece, Spain, Portugal and Italy will be able to instigate austerity packages whilst creating sufficient economic growth to manage existing debt payments. While markets, and other regions to some extent, are looking for a large scale solution, with Germany in the driving seat it is likely that austerity and a slow grind back to manageable levels of sovereign debt will be the order of the day. While this may not bode well for European companies exposed to certain areas of Europe, there are many European companies which are truly global in nature and exposed to higher growth areas such as the US and Asia.
The outlook for the rest of the world actually appears slightly rosier. Asian and emerging countries have generally weathered the credit crisis well and are showing higher economic growth, a growing consumer and lower debt levels than the west. Economic indicators suggest that the US is starting to turn the corner. In particular, the US consumer, so important to both domestic and global economic growth, appears to be maintaining their spending. Forthcoming presidential elections in November could add to uncertainty but US markets have historically tended to do well in election years. The UK is most at risk from continued problems in Europe, it being our nearest neighbour and biggest trading partner. However, the government has put the UK on course for financial stability and economic growth, while low, is at least positive.
Given the focus on headline macroeconomic factors in 2012, it is likely once again that the choice of ‘where’ to invest will be less important than the choice of ‘what’ to invest in. Conventional wisdom states that cash and government bonds are the lowest risk investments but with deposit accounts paying 2-3%pa at best and 10-year gilts yielding just 2% with no capital growth potential, there is little attraction of holding these as long-term investments when inflation is running in excess of 4%.
Equities on the other hand would seem to offer significant long-term value, if investors can accept the risk of short-term fluctuations. For example, the largest 100 companies in the UK currently yield 3.5% on average and offer the potential for rising dividends as well as capital growth.
Unfortunately, no-one knows exactly how 2012, or indeed any part of the future, will pan out for investments. For cautious investors or those looking to dip their toe in the water, therefore, a well-diversified, professionally managed fund such as Fidelity Multi Asset Strategic may be an attractive option. For investors willing to accept more risk, then UK or Global equity income focussed funds, such as Invesco Perpetual Income or Newton Global Higher Income, offer the potential for attractive returns while Asia-focussed funds such as First State Asia Pacific Leaders offer a more spicy option.
To discuss your current investments or your options in more detail, contact us now.
Please note that performance of the funds listed above cannot be guaranteed. Capital values and income can all go down as well as up. The information on this page is intended for information only and does not constitute personal advice. When you are considering making a lump sum investment or saving regularly it is important to ensure the fund meets your attitude to risk and your objectives. Please contact us for more information on these funds or to arrange an appointment to discuss your investment options. The opinions in this article are those of the author and are not intended as personal advice. Protection & Investment Ltd is authorised and regulated by the Financial Services Authority.
Other resources:
“ I knew very little about investing and previously picked funds with a random approach. Neil understands my needs and has found funds that not only give good returns but also meet my timescales - Miss N, London ”
